Dear Editor,
For full disclosure, I was appointed Director on the Board of Directors for Atlantic Hotel Inc. (AHI) in 2020. AHI is the entity under which the government owned Marriott Hotel is operated. As such, the discussion and analysis presented herein is based on the fact that I am privy to the financial information of the Marriott Hotel. Much has been said about the Marriott sale. In fact, much has been said about the Marriott since the inception when it was built by the government. As I have said on several occasions publicly, one has to understand the background to the government’s decision to build the Marriott Hotel in the first place. It was never the intention of the government to build and keep the Marriott for an indefinite period. It was always the intention of the government to build and liquidate its stake at the appropriate time for the right price.
The Marriott was built in an era when Guyana was starved for investments including foreign direct investments (FDIs). Despite the many attractive incentives that have existed since then, the country was unable to attract significant investments owing to a lack of confidence in the economy, especially in the tourism sector. The need for hotels of four and five-star standards (which never existed before), was in keeping with a tourism strategy for the country developed three decades ago. In the post-1992 era, the average annual FDI into the country was less than US$100 million up to 2008, and averaged US$200 million from 2009 through 2017, two years after crude oil was discovered in commercial quantities. From 1997–2001, private sector credit grew by 16% or 4% on average annually during that period, from a position of $43 billion in 1997 to $50 billion in 2001. And from 2002-2012, private sector credit grew cumulatively by 103% from $55 billion to $116 billion, representing 10% average annual growth. These were not significant growth rates in FDIs and private sector credit during those years.
In the first bid-round of the Marriott, this author had taken note of an editorial in the Stabroek News edition of April 8th, 2023, with the caption, “Gov’t decision to discard Marriott bids raises questions.” The editorial cited an unknown “analyst” who argued that all bidders who offered US$50 million and more in effect agreed to pay 15 years of profit. The analyst contended that in today’s environment, “the offer price is attractive considering the ten new hotel projects approved by the government and that on Wall Street, blue chip companies’ valuation range from 8 to 12 times annual profits and asked why the 15+ times profit is not an attractive price”. Of note, the unknown/anonymous analyst is referring to the Price-to-Earnings (P/E) Ratio. For the readers benefit, the P/E ratio is a metric used for the valuation of a company that measures its current share price relative to its earnings per share (EPS). This ratio is the price multiple or the earnings multiple and it gives an indication of how much an investor is willing to pay for a company’s stocks based on its earnings.
The P/E ratio indicates whether a company is undervalued or overvalued and can be benchmarked against other stocks in the same industry or against the broader market, such as the S&P 500 and Nasdaq Indexes (globally), or the broader domestic market in the case of Guyana. However, the range of 8-12 cited in the editorial by the unknown analyst is not entirely correct. A better indication would be derived from examining the average P/E as per the abovementioned indexes. To this end, as of May 12th, 2023, the NASDAQ P/E ratio averaged 27.56 and S&P 500 P/E averaged 18.42. Typically, a high P/E ratio is considered above 20x, suggesting that companies’ stocks are overvalued, or investors are expecting higher future growth rates.
With this in mind, the previous highest offer of US$65 million represented 13 times the pre-tax profit and 17 times after-tax profit, assuming a pre-tax profit of US$5 million and net profit of US$3.75 million. And now, the new highest offer of US$90 million represents 18 times the pre-tax profit and 24 times the net profit. Thus, the P/E ratio based on the latest highest offer price is in line with the S&P 500 and NASDAQ indexes. Further to note, there are mainly three broad methods of valuation for companies. These are the asset approach (fair market value (FMV) of net assets), the income approach (intrinsic value) and the market approach (relative value). In the case of Guyana, bearing in mind that the local stock market and by extension the broader financial market is an inefficient market (not as efficient and sophisticated as in the case of Wall Street), and that the Marriot’s stocks are not traded on the local stock market, an appropriate method of valuation need to be adopted.
These limitations necessitate the adoption of a combination of the income approach and market approach methods to determine the Enterprise Value (EV) of the company. In so doing, these methods entail analyzing the historic trends (backward looking), and a forward-looking projected basis. This means that a number of assumptions on the projected future growth will have to be constructed in which a sensitivity and scenario analyses can be performed. Of course, as this is a long-term investment, such analyses will be premised upon the overarching growth and development trajectory of the economy in decades to come. Again, for the readers benefit, enterprise value or firm value is a measure of a company’s total value, often used as a comprehensive alternative to equity market capitalization, reflecting the market value of a business which is distinct from the market price. Having performed an analysis as described above, this author derived an EV with conservative assumptions of US$74 million under a pessimistic scenario and US$94 million under a cautiously optimistic scenario. Additionally, given that the offer price will be used in part to clear the loans on the balance sheet, this will effectively result in additional free cash flow.
So, assuming that the investor is a private equity investor, the investor will recover the initial invested capital within twelve years with a positive net present value (NPV) assuming a 5% y-o-y growth in net profit. Or, under a more conservative scenario, even if the net profit averages US$6 million one year after the investment and grows conservatively at a rate of 2% annually over the next fifteen years, the investor will still recover the investment cost within fifteen years with a positive NPV at a discount rate of 5%. Almost a decade later, if the new offer is accepted, this will effectively translate into a return on investment (ROI) for government of approximately 65%, taking into account the offer price and the profits earned over years since the Marriott has been in operations. Worthy of note, it is not unreasonable to view this as an extremely decent ROI at this time, because in the current environment, the average profit margin in the global hotel industry is 4%.
Finally, against all of the foregoing, the new highest offer price of US$90 million reflects a more realistic comprehensive value of the entity considering the entity’s historic financial performance and future growth projections. This also signals the investor’s confidence and optimism in the positive future prospects of the economy at large. Moreover, the new highest offer price is sufficient to clear the long-term debt on the balance sheet, and the remainder of not less than a third, will be transferred to the Consolidated Fund.
Sincerely,
Joel Bhagwandin
Public Policy and Financial Analyst
